9/20/2020 SUPREME COURT REPORTS ANNOTATED VOLUME 203 9/20/2020 SUPREME COURT REPORTS ANNOTATED VOLUME 203

employee who retires, resigns or is separated

from the service through no fault of his own.
(Manual on Leave Administration Course for
Effectiveness published by the Civil Service
Commission, pages 16-17). In the exercise of
sound personnel policy, the Government
encourages unused leaves to be accumulated.
72 SUPREME COURT REPORTS
The Government recognizes that for most public
ANNOTATED
servants, retirement pay is always less than
Commissioner of Internal Revenue vs. generous if not meager and scrimpy. A modest
Court of Appeals nest egg which the senior citizen may look
*
forward to is thus avoided. Terminal leave
G.R. No. 96016. October 17, 1991. payments are given not only at the same time
but also for the same policy considerations
COMMISSIONER OF INTERNAL governing retirement benefits.”
REVENUE, petitioner, vs. THE COURT
OF APPEALS and EFREN P. PETITION for certiorari to review the
CASTANEDA, respondents. decision of the Court of Appeals.

The facts are stated in the resolution of the

Taxation; Withholding tax; Terminal leave Court.
pay; Terminal leave pay received by a           Leovigildo Monasterial for private
government official or employee is not subject to respondent.
withholding tax.—The Court has already ruled
that the terminal leave pay received by a
RESOLUTION
government official or employee is not subject to
withholding (income) tax. In the recent case of
Jesus N. Borromeo vs. The Hon. Civil Service PADILLA, J.:
Commission, et al., G.R. No. 96032, 31 July
1991, the Court explained the rationale behind The issue to be resolved in this petition for
the employee’s entitlement to an exemption review on certiorari is whether or not
from withholding (income) tax on his terminal terminal leave pay received by a
leave pay as follows: “x x x commutation of government official or employee on the
leave credits, more commonly known as occasion of his compulsory
terminal leave, is applied for by an officer or
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_______________
* SECOND DIVISION.
VOL. 203, OCTOBER 17, 1991
Commissioner of Internal Revenue vs.
Court of Appeals
retirement from the government service is
subject to withholding (income) tax.
We resolve the issue in the negative.
Private respondent Efren P. Castaneda
retired from the government service as
Revenue Attache in the Philippine
Embassy in London, England, on 10
December 1982 under the provisions of
Section 12 (c) of Commonwealth Act 186,
as amended. Upon retirement, he received,
among other benefits, terminal leave pay
from which petitioner Commissioner of
Internal Revenue withheld P12,557.13
allegedly representing income tax thereon.
Castaneda filed a formal written claim
with petitioner for a refund of the
P12,557.13, contending that the cash
equivalent of his terminal leave is exempt
from income tax. To comply with the two-
year prescriptive period within which
claims for refund may be filed, Castaneda
filed on 16 July 1984 with the Court of Tax
Appeals a Petition for Review, seeking the
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9/20/2020 SUPREME COURT REPORTS ANNOTATED VOLUME 203
refund of income tax withheld from his
terminal leave pay.
The Court of Tax Appeals found for
73 private respondent Castaneda and ordered
the Commissioner of Internal Revenue to
refund Castaneda the sum of P12,557.13
73 withheld as income tax. (Annex “C”,
petition).
Petitioner appealed the above-
mentioned Court of Tax Appeals decision
to this Court, which was docketed as G.R.
No. 80320. In turn, we referred the case to
the Court of Appeals for resolution. The
case was docketed in the Court of Appeals
as CA-G.R. SP No. 20482.
On 26 September 1990, the Court of
Appeals dismissed the petition for review
and affirmed the decision of the Court of
Tax Appeals. Hence, the present recourse
by the Commissioner of Internal Revenue.
The Solicitor General, acting on behalf
of the Commissioner of Internal Revenue,
contends that the terminal leave pay is
income derived from employer-employee
relationship, citing in support of his stand
Section 28 of the National Internal
Revenue Code; that as part of the
compensation for services rendered,
terminal leave pay is actually part of gross
income of the recipient. Thus—
“x x x. It (terminal leave pay) cannot be viewed
as salary for purposes which would reduce it. x
x x there can thus be no ‘commuta-
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74 policy, the Government encourages unused

leaves to be accumulated. The Government
recognizes that for most public servants,
74 SUPREME COURT REPORTS
retirement pay is always less than generous if
ANNOTATED
not meager and scrimpy. A modest nest egg
Commissioner of Internal Revenue vs. which the senior citizen may look forward to is
Court of Appeals thus avoided. Terminal leave payments are
given not only at the same time but also for the
tion of salary’ when a government retiree same policy considerations governing
applies for terminal leave because he is not retirement benefits.”
receiving it as salary. What he applies for is a
‘commutation of leave credits.’ It is an In fine, not being part of the gross salary or
accumulation of credits intended for old age or income of a government official or
separation from service. x x x.” employee but a retirement benefit,
terminal leave pay is not subject to income
The Court has already ruled that the tax.
terminal leave pay received by a ACCORDINGLY, the petition for review
government official or employee is not is hereby DENIED.
subject to withholding (income) tax. In the SO ORDERED.
recent case of Jesus N. Borromeo vs. The
Hon. Civil Service Commission, et al., G.R.      Paras and Regalado, JJ., concur.
No. 96032, 31 July 1991, the Court           Melencio-Herrera (Chairman), J.,
explained the rationale behind the On leave.
employee’s entitlement to an exemption
from withholding (income) tax on his Petition denied.
terminal leave pay as follows:
——o0o——
“x x x commutation of leave credits, more
75
commonly known as terminal leave, is applied
for by an officer or employee who retires,
resigns or is separated from the service through
no fault of his own. (Manual on Leave
Administration Course for Effectiveness
published by the Civil Service Commission,
pages 16-17). In the exercise of sound personnel
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